The board of a company (Firm A) has agreed to pursue a new project and the Chief Financial Officer (CFO) is directed to organise debt funding of $150 million for the life of the project, which is 15 years. The CFO speaks with several banks and determines that it may borrow:

• Floating at BBSW + 2.55%pa
• Fixed rate debt at 6.75%pa

A large corporate (Firm B) has launched a takeover bid for a rival firm, that has fallen on hard times, and the CFO of the suitor company has been directed to raise funds for the takeover, which is expected to be successful. The CFO meets with the deal team and learns that if the takeover is successful at the current offer price that the transaction will be cash flow positive immediately and that funding is required for 15 years. The CFO also has the view that interest rates are going to decline over that period and therefore prefers raising floating rate debt. The CFO speaks with their banker and learns that it may borro

• Floating at BBSW + 2.00%pa
• Fixed at 4.35%pa

Government debt is trading at 1.05%pa

Both CFO's happen to approach the same investment bank, you, to explore funding their requirements via a swap.

You are willing to enter into an intermediated swap with both parties, on the condition that you make 0.15% from each party of the swap transaction.

Determine the swap strategy that maximises the benefit of the swap for each party, including your investment bank.

1. Specify the swap cashflows
2. Calculate the borrowing costs and the benefit to each party from entering into the swap.